Midterm in Germany: Where does the coalition stand?

Midterm in the German election cycle, at the beginning of the 2023 summer recess, the “progress coalition” led by Chancellor Olaf Scholz (SPD), Vice Chancellor Robert Habeck (Greens) and Finance Minister Christian Lindner (FDP) appears increasingly tired, with the fallout from Russia’s war in Ukraine dominating much of the government’s attention and policymaking. The energy transition has been hampered by challenges, notably the controversial Building Heating Act. The economy has been in a technical recession since May, with uncertainty around the cost of energy, tightening financial conditions, and the availability of skilled workforce contributing towards negative GDP growth. Against this backdrop, the government lost its majority in the polls several months ago and has been dogged by infighting between the three parties, further exacerbated by recent Green Party and FDP losses at state-level elections.  

With two years to go until the next national election, debates around the competitiveness of the German economy are heightening. Now is an opportune moment for German, European and international businesses with an interest in the German market to engage with German policymakers. These debates also have direct repercussions for discussions of similar issues at EU level. 

On the EU stage, following open clashes between Scholz and Macron over the past year on nuclear energy, hydrogen, the transatlantic relationship, the investment approach towards China, fiscal policy, and more, the Franco-German relationship has returned to a more pragmatic, if unenthusiastic, footing. While challenges remain at a personal level, both sides know that real progress within the EU can only be achieved if the two largest Member States work together. Scholz will need to show greater engagement with Macron to repair the damage done to the relationship.  

Before the summer recess, Germany published its China strategy, which contained few major surprises and no new policy announcements. The overall objective is to ‘de-risk’ the German economy – as opposed to decoupling - meaning Germany should become less dependent on China in critical sectors by diversifying its supply chains and export markets. This echoes the sentiment of the EU’s Economic Security Strategy, published in June, which envisages the introduction of an EU export control and outward investment coordination mechanism for dual-use technologies. The German-China strategy, however, falls short of announcing concrete steps and new economic policy tools. For example, no further changes are envisaged to the current FDI screening mechanism or to export control policy. 

Outlook to the next General Election in September 2025 

The future political situation in Germany is difficult to predict. It remains clear, however, that the fundamentals of German policy will continue. The 2025 government will likely consist of three (or possibly two) of the centrist parties SPD, CDU/CSU, Greens and FDP. We do not expect either the AfD or Left party to become a part of the government. 

While we do not expect the coalition to collapse ahead of the 2025 General Election, it will have to manage a series of critical challenges and roadblocks. A series of high-stakes local and European Parliament elections will be seen as indicators of the government’s effectiveness by the German public.  

At this midterm in Germany 2023, several outcomes are possible: a re-election of the current government (potentially even led by a Green chancellor), a CDU/CSU led “Jamaica coalition” with Greens and the FDP, or even a coalition of CDU/CSU and Greens.  Whether Scholz can win a second term depends on the government’s ability to reset its course. The government must additionally deliver rapid progress on the transformation tasks in the coalition agreement, including on digitisation, transport, and de-bureaucratisation. If current political tensions are calmed, Germany should be able to return to a course of growth and to pass on the "Red Lantern". 

In the short term, two challenges lie ahead:  

• The 2024 budget: Finance Minister Christian Lindner (FDP) has attempted to push through a no-debt proposal, but there are several calls by the Greens and the SPD for further spending, particularly on social security.  
• Two important state elections will take place in October, with sitting State Premiers Boris Rhein (CDU in Hesse) and – most importantly – Markus Söder (CSU in Bavaria, also CSU party chairman) running for re-election.  

In 2024 three state elections are expected – all in East Germany. These could lead to substantial gains for the far-right AfD party and thus reignite the fundamental debate over the far right’s place in German politics.  

In the run-up to the 2025 national election five issues are expected to dominate: 

• European and foreign policy are unlikely to be as prominent as they were throughout 2022. However, ongoing support for Ukraine, the state of the German army, European collaboration, and EU enlargement will remain important issues. The four major parties (SPD, CDU/CSU, Greens and FDP) have yet to clearly differentiate their policy positions, with the exception of funding implications. 
• After a disastrous first half of the year on climate issues, centring on the contentious Heating Bill (also referred to as the boiler ban), climate protection policy will become more pragmatic. Certain policy decisions (e.g. German CO2 price and quotas) will be considered through the lens of consumer protection and business competitiveness. The discussion on the risk of German de-industrialisation will gain traction. 
• Against a backdrop of increasing demands for state action, taxation and social spending are back on the agenda, raising the question of whether the famous “black zero” can be maintained whilst increasing social spending. 
• The number of asylum seekers, war refugees and illegal immigrants has reached an all-time high. Tensions, especially at municipal level, have increased. Policy action at all levels (EU, federal, state, municipal) will be seen as necessary and will be a central issue in political debate.   
• Finally, cultural rifts and the divide between urban and rural parts of the country are growing bigger, whilst historic East-West divisions persist. This is likely to be used as a wedge issue between political parties, with the AfD in particular campaigning on cultural issues of “wokeness”.  

This blog post was written by Senior Advisers Thomas Matussek, Andreas Krautscheid and Markus Becker-Melching.  If you are interested in further insights and support for German, European or global businesses to raise their voice in German politics, get in touch.